Cass Undergraduate School

BSc (Hons) Degree in Banking and International Finance BSc (Hons) Degree in Business Studies BSc (Hons) Degree in Economics and Accountancy BSc (Hons) Degree in Management BSc (Hons) Degree in Accounting and Finance

BS2107 Management Accounting

Part 2 Examination

16 January 2012
Instructions to students:

14:30 16:45

Candidates must answer ALL TWENTY questions from Section A and ONE question from Section B. Section A of this paper consists of TWENTY multiple choice questions with each having FOUR possible solutions, only ONE of which is correct. (80 marks available, worth 70% of the final grade) Your answers must be recorded on the multiple choice answer sheet distributed by your invigilator. The instructions for completion are on that form and must be striclty adhered to. Candidates will score four marks for each correct answer and no marks for a question you do not answer. A deduction of one half mark will be made for an incorrect answer to discourage guessing. This examination paper consists of 10 printed pages including the title page. Materials: Number of answer books to be provided: 1 Only the Casio calculators FX-83 or FX-85 (MS or ES or GT+) are permitted for use in this exam Multiple choice answer sheet. Dictionaries are not permitted. This examination paper MAY NOT be removed from the examination room. External Examiner: Professor Paul Collier Internal Examiner: Indrani Balachandran
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Section A

Answer all questions

Use the following data for questions 1 & 2: H Ltd. operates a process costing system. The following activity was recorded for Process 1 during December: Number of Units 8,000 50,000 12,000 Conversion % Completed 35% 55%

Work in progress 1 December Started into production during December Work in progress 31 December All materials are added at the beginning of the process.

Question 1 The equivalent units for conversion for December, using the weighted average method, were: A B C D 52,600 units 62,000 units 50,000 units 46,000 units 46,000 6,600 52,600 units

Output Closing WIP (55% of 12,000) Equivalent units for conversion

Question 2 The equivalent units for materials for December, using the first in first out method, were? A B C D 46,000 units 42,000 units 58,000 units 50,000 units 0 38,000 12,000 50,000 units

Opening WIP Output Closing WIP (100% of 12,000) Equivalent units for conversion

Question 3 Which of the following is an aspect of a just in-time (JIT) system? (i) (ii) (iii) (iv) A B C D The use of small frequent deliveries against bulk contracts Flexible production planning in small batch sizes A reduction in machine set-up time Production driven by demand (i) only (i), (ii), (iii) and (iv) only (i), (ii) and (iv) only (i) and (iv) only

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Question 4 Which of the following statements are correct? (i) (ii) (iii) (iv) When target costing is used, the selling price of a product or service determines its target cost. An activity based costing (ABC) system makes some use of volume related cost drivers. Life cycle costing does not track costs that are incurred once production has ceased, since there are no revenues against which to match the costs. A just-in-time system tends to cause increased storage costs as inventory is held to ensure that materials are available just as they are needed in production. (i) and (ii) only (i) and (iii) only (ii) and (iv) only (iii) and (iv) only

A B C D

Use the following to answer questions 5 & 6 Neame Ltd. uses the weighted average method in its process costing system. This month, the beginning inventory in the mixing department consisted of 700 units. The costs and percentage completion of these units in the beginning inventory were: Cost 12,700 10,900 % Complete 85% 30%

Material costs Conversion costs

A total of 9,800 units were started and 8,800 units were transferred to the forming department during the month. The following costs were incurred in the first processing department during the month: Cost 175,600 420,900

Material costs Conversion costs

The ending inventory was 85% complete with respect to materials and 70% complete with respect to conversion costs. Note: Your answers may differ from those offered below due to rounding error. In all cases, select the answer closes to the answer you computed. To reduce rounding error, carry out all computations to at least three decimal places. Question 5 The total cost transferred from the mixing department to the forming department during the month is closest to: A B C D 620,100 646,832 542,106 596,500

Question 6 The cost of ending work in progress in the mixing department according to the companys cost system is closest to: A B C D 77,994 73,308 104,725 89,016

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Closing WIP = 700 + 9,800 8,800 = 1,700 units Statement of equivalent units Output Closing WIP Total equivalent units Costs incurred Costs b/f Costs in current period Total cost Cost per equivalent unit Q6 Cost of output Q7 Value of Closing WIP Closing WIP Eq. units Cost per equivalent unit Value of closing WIP Material 1,445 18.380 26,559.10 Con. Cost 1,190 43.223 51435.37 Total 8,800 x 61.603 = 542,106 Material 8,800 1,445 10,245 12,700 175,600 188,300 18.380 Con. Cost 8,800 1,190 9,990 10,900 420,900 431,800 43.223 61.603 Total

77,994.47

Question 7 To improve performance, a manager would like to see a decreasing trend in all of the following performance measures except: A B C D Customer complaints as a percentage of units sold Scrap as a percentage of total cost Setup time Manufacturing cycle efficiency

Question 8 PQR Ltd. uses direct labour hours in its predetermined rate. The total estimated manufacturing overhead was 221,100. At the end of the year, the actual direct labour hours for the year were 14,400 hours and the actual manufacturing overhead was 216,100. If the manufacturing overhead for the year was over-applied by 21,500, the predetermined overhead rate for the year must have been closest to: A B C D 15.01 17.73 15.35 16.50 216,100 21,500 237,600 14,400 237,600/14,400 = 16.50

Actual overheads Overheads over-absorbed Overheads absorbed Actual hours Predetermined overhead rate

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Question 9 AB Ltd. Currently sets its selling price at 10, which achieves a 25% mark-up on variable cost. Actual production and sales volume is 100,000 units and annual fixed costs are 80,000. By how much would the selling price need to be increased in order to double the profit. Assume costs, production and sales volumes remain unchanged? A B C D 12% 17% 20% 25% Per unit 10.00 8.00 2.00 Original 100,000 units 1,000,000 800,000 200,000 80,000 120,000 Revised 100,000 units 1,120,000 800,000 320,000 80,000 240,000

Selling price Variable cost Contribution Less: Fixed cost Profit

125% 100% 25%

To double the profit to 240,000 the total revenue has to be 1,120,000 which is a 12% increase on the original selling price.

Question 10 Flexed budgets for the cost of medical supplies in a hospital, based on a percentage of maximum occupancy, are shown below: Bed occupancy Medical supplies cost 82% 410,000 94% 429,200

During the period, the actual bed occupancy was 87% and the total cost of the medical supplies was 430,000. The medical supplies expenditure variance was: A B C D 5,000 adverse 12,000 adverse 5,000 favourable 12,000 favourable Difference 12% 19,200

Bed occupancy Medical supplies cost Variable cost per 1% occupancy

82% 410,000

94% 429,200

= 19,200/12% = 1,600 = 131,200 = 410,000 = 278,800

Total variable cost at 82% occupancy Total cost at 82% occupancy Total fixed cost Flexed budget for 87% occupancy Variable cost (1,600 x 87%) Fixed cost Total flexed budget Actual expenditure Expenditure Variance

= 139,200 = 278,800 = 418,000 = 430,000 = 12,000 adverse

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Question 11 A company manufactures and sells a single product. The following data has been extracted from the current years budget: Sales and production (units) Variable production cost per unit Fixed cost per unit Contribution margin (C/S) ratio 5,000 50 70 75%

The selling price per unit for next year is budgeted to increase by 8%, whereas both the variable production cost per unit and the total fixed costs are expected to increase by 12%. The objective for next year is that total budgeted profit should remain the same as that budgeted for the current year. The minimum number of units which should be produced and sold next year in order to achieve the company objective is: A B C D 4,688 4,950 5,209 5,280 = (SP VC)/SP = (SP 50)/SP = 200 = 5,000 x 200 x 75% = 750,000 = 350,000 (70 x 5,000) = 400,000

Current year C/S ratio (75%) 75% Therefore SP Total contribution Less: fixed cost Profit Next year Revised fixed cost

= 350,000 x 1.12 = 392,000 Revised contribution to earn same profit = 792,000 (400,000 + 392,000) Revised SP = 200 x 1.08 = 216 = 50 x 1.12 = 56 = 216 - 56 = 160 = 792,000/160 = 4,950 units

Revised VC

Revised contribution per unit Minimum number of units required

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Use the following to answer questions 12 & 13 Connor and Ledger Partnership provide accountancy and tax advice services and has three categories of clients: Limited companies, Sole traders and Individuals in employment. The partnership charges its clients a fee by adding 20% mark-up to total costs. Currently the costs are attributed to each client based on hours spent on preparing accounts and providing advice. Connor and Ledger are considering changing to an activity based costing system and has identified three cost pools. Information relating to the three costs pools is as follows: Estimated Overhead Cost 580,000 45,000 100,000

Activity Cost Pool Account preparation and advice Issuing fee payment reminders Client meetings

Estimated Activity 18,000 staff hours 400 reminders 250 client meetings

Information (on a client basis) relating to the three categories of clients is as follows: Limited Company Staff hours spent preparing accounts and providing advice No. of reminders sent No. of client meetings held 1,000 2 4 Sole Trader 250 8 1 Individual 340 10 2

Question 12 Under the current traditional system the fee charged to a Limited Company is: A B C D 40,857 42,556 48,333 50,348 = 725,000 = 18,000 = 725,000/18,000 = 40.278 = 1,000 x 40.28 = 40,278 = 40,278 + 8,055.6 = 48,333.6

Total overheads Total staff hours Overhead abs. rate Cost Limited Company Fee

Question 13 Under the new activity based system the fee charged to a Limited company is: A B C D 40,857 42,556 48,333 50,348 Estimated Activity 18,000 staff hours 400 reminders 250 client meetings Estimated OH Cost 580,000 45,000 100,000 Activity rate 32.222/ hour 112.50/ reminder 400/client

Activity Cost Pool Account preparation and advice Issuing fee payment reminders Client meetings

Amount chargeable to a limited company: Account preparation and advice = 32.222 x 1,000 Issuing fee payment reminders = 112.50 x 2 Client meetings = 400 x 4 Total cost Fee

= 32,222 = 225 = 1,600 = 34,047 = 34,047 x 120% = 40856.40

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Use the following to answer questions 14 & 15 PMS plc has a highly automated manufacturing process, During December the company gathered the following data relating to its manufacturing process: Process time Inspection time Wait time prior to starting production Move time Question 14 The companys delivery cycle time is: A B C D 13 hours 16 hours 15 hours 12 hours = wait time + process time + inspection time + move time + queue time = 6 + 6 + 3 + 1 = 16 hours 6 hours 3 hours 6 hours 1 hour

Delivery cycle time

Question 15 The companys manufacturing cycle efficiency is: A B C D 60% 40% 75% 25% = Value added time/ Throughput time = 6/ (6 + 3 +1) = 60%

Manufacturing cycle efficiency

Question 16 Mabel plc. recently changed the selling price of one of its products. Data concerning sales for comparable periods before and after the price change are presented below: Selling price 50.00 51.00 Unit Sales 2,100 1,990

The products variable cost is 18.00 per unit. The products profit maximising price is closest to: A B C D d 29.99 19.30 29.13 28.48 = ln (1 + % change in demand) ln (1 + % change in price) = ln (1 + (-110/2100)) ln (1 + (1/50)) = ln (1 - .0524) = ln 0.9476 ln (1 + .02) ln 1.02 = -2.718

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Profit maximising price =

d x V cost (1 + d)

= -2.718 x 18.00 (1 2.718) = 28.48

Question 17 Division X of Madonna Ltd produced the following results in the last financial year: 000 400 2,000

Net profit Average net assets

For evaluation purposes all divisional assets are valued at original cost. The division is considering a project which will increase annual net profit by 30,000, but will require average inventory levels to increase by 100,000 and fixed assets by 100,000. Madonna Ltd imposes a 16% capital charge on its divisions. Given these circumstances, will the evaluation criteria on return on investment (ROI) and residual income (RI) motivate division X managers to accept the project? ROI No Yes No Yes RI Yes Yes No No Company 400k/ 2,000k 20% 400k 16% x 2,000k 400 - 320 80K Project 30,000/ 200,000 15% 30,000 16% x 200,000 =30,000 - 32,000 = -2,000

A B C D

ROI

= = = = =

Reject

RI

Reject

Question 18 The following information relates to Solar plcs Saturn division for 2011: Sales Net operating income Stockholders equity Average operating assets Residual income 750,000 45,000 75,000 100,000 15,000

The minimum required rate of return used in calculating the residual income for 2011 was: A B C D 30% 12% 15% 6% = Net operating income Minimum required return = 45,000 x% 100,000 = 45,000 - 15,000 = 30,000 = 30%

RI 15,000 X% 100,000 Minimum required %

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Use the following to answer questions 19 & 20 Division T of Timepiece Ltd. makes a timer which it sells for 40 to external customers. Data relating to the timer is as follows: Monthly capacity Variable cost per unit Fixed cost per unit 60,000 timers 28 9

Presently, Division S of Timepiece Ltd. buys similar timers from an overseas supplier at 38 each. Timepiece Ltd. would like these timers bought from Division T. If Division T sells to Division S, 1 in variable costs can be avoided. Question 19 Assume that Division T is presently operating at capacity. According to the formula in the text, what is the lowest acceptable transfer price from the view point of Division T? A B C D 37 39 36 38

Operating at full capacity Lowest acceptable transfer price = External market price less avoidable costs = 40 - 1 = 39

Question 20 Assume that Division T has sufficient idle capacity to handle all of Division B,s needs without any increase in fixed costs and without reducing external sales. What is the lowest acceptable transfer price from the view point of Division T? A B C D 40 39 28 27

Spare capacity exists Lowest acceptable transfer price = Variable cost less avoidable cost = 28 - 1 = 27

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